Treasury Secretary Steven Mnuchin, right, and Director of the National Economic Council Gary Cohn discuss the goals and feasibility of President Trump’s tax reform plan in the Press Briefing Room of the White House Wednesday, April 26, 2017 in Washington, D.C. (Olivier Douliery / Abaca Press)
The White House unveiled a broad outline Wednesday for a dramatically simpler tax code that could lead to lower tax bills for many ordinary taxpayers but also eliminate many of the tax deductions that Americans currently claim.
President Trump’s plan, which did not include many details, could cut taxes for some middle and high-income families, parents,and also reduce taxes for businesses large and small. The plan would also substantially increase the standard deduction, which reduces a person’s taxable income, and would eliminate some common tax deductions such as those used to offset medical costs or state and local taxes.
Until more details are known, it is difficult to know exactly how some taxpayers will fare. The White House will need to work with Congress on the final plan, which could look very different if lawmakers push back against some of the proposed changes.
Here is a look at some of the major changes that could affect you:
Larger standard deduction would mean lower tax bills.
The plan calls for doubling the standard deduction that people can claim on their income tax returns, which would lower tax bills for some taxpayers and lead to a much simpler tax filing process for others. Under the proposal, married couples filing jointly would not owe income taxes on the first $24,000 of income (up from $12,600).
Gary Cohn, the director of Trump’s National Economic Council, told reporters Wednesday that the higher standard deduction means that fewer people will have to file itemized deductions to reduce their taxable income, which could lead to a simpler tax return.
Most tax deductions are going away.
All individual tax deductions would be eliminated, with the exception of deductions related to homeownership and charitable contributions, Treasury Secretary Steven Mnuchin said at the briefing Wednesday.
Under that scenario, taxpayers would no longer be able to write off expenses now commonly deducted, such as state and local property taxes and medical expenses. The White House will have to work with Congress to finalize the details of the plan, and it’s not clear if lawmakers will be willing to eliminate some of the deductions that may be popular in their home states.
Fewer tax brackets.
The proposal would simplify the system to go from seven tax brackets to three brackets of 10 percent, 25 percent and 35 percent. Currently, tax brackets range from 10 percent to 39.6 percent. High earning taxpayers could see an immediate tax break on their income taxes, while low-income families may not feel much of a change, says Alan Cole, an economist with the Tax Foundation, a conservative think tank. However, the proposal did not disclose the income ranges for the new tax brackets.
Bigger tax breaks for parents.
The plan calls for increasing the tax benefits available to families paying for child and dependent care costs, such as day care, but few details were provided. Trump is considering raising the Child and Dependent Care Tax Credit, a tax break that currently allows parents to reduce their tax bills by up to $2,100, based on how much they spend on child care.
The approach would be different from Trump’s earlier plan, which was criticized as an approach that would mostly benefit higher earners. That plan would have allowed parents to deduct the cost of child care from their income, which would not have provided much tax savings to lower-income families that don’t owe much in income taxes.
Reduced taxes on the wealthy.
The plan calls for eliminating two key taxes that traditionally affect higher earners: the alternative minimum tax and the estate tax. The alternative minimum tax is intended to prevent high earners from being able to avoid all income taxes but can also affect middle-income taxpayers.
The estate tax, which is also known as the death tax, affects people who inherit wealth or businesses worth more than about $5.5 million. Some people struggle to pay tax bills owed on money and assets they inherit from family members, Cohn said.
Lower tax rate for business owners.
Some small and family-run businesses are subject to individual income tax rates, which are currently as high as 39.6 percent. Under the president’s plan, they would pay a lower rate of 15 percent. Mnuchin said the administration would include provisions to keep wealthy business owners of large companies from taking advantage of the lower rate, but did not offer details.